Mises Daily Articles
Is Ken Lay A Criminal?
The recent federal indictment of former Enron Chairman Ken Lay seems to be quite popular with the political classes and the public at large, following the trend in prosecutions of "white collar crime" over the past few years.
Attorney General John Ashcroft might be unpopular among Democrats and the mainstream media for many things, but the press always seems to love the latest scalps of U.S. corporate figures that the DOJ throws them.
Thus, with Lay's indictment has come a spate of approving stories from outlets from the New York Times to U.S. News, Time, and Newsweek. Indeed, the only problem with the indictments, at least according to Democrat presidential contender John Kerry, is that they did not come soon enough.
While the press sings the praises of federal prosecutors, however, the current set of indictments against Lay may have even less merit than the government's indictments (and subsequent convictions) of Martha Stewart and Frank Quattrone, both of which we have strongly criticized on this page. Yes, that is correct; the most unpopular man in the USA very well may not have committed any crimes.
Before tackling the merits (or demerits) of the government's case against Lay, there are a few things the readers should know. The first is that although Lay may not be guilty of the crimes with which the government has charged him, someone involved with the case has committed a felony. It is against the law to leak grand jury testimony or procedures to the press, including information that a sealed indictment has been issued (and the contents of that indictment).
This is ironic; most of the nation's newspapers have been enthusiastic about the indictment of Lay, yet whoever received secret information about the indictment (and subsequently published it) aided and abetted a felony. Given the history of the conduct of federal prosecutors in high-profile, white collar cases, however, it is almost certain that the felony leak came from the U.S. attorney's office in Houston, where the indictment took place.
Thus, federal prosecutors are unencumbered with the burden of legal penalties when they commit actual crimes (as opposed to many of the make-believe "derivative" crimes with which business executives are charged). That should give everyone pause as to the ethical boundaries (or lack of them) that bind these "public servants" as they go about the government's business of increasing the nation's prison population.
The "prosecutor as hero" theme reverberates in the media. What follows (from the July 19, 2004, edition of U.S. News) is typical of the state-worshiping press in the wake of the Lay indictments:
The federal prosecutors mopping up after corporate scandals can remember the summer of 2004 as their season of sweet victory. Last week a jury convicted Adelphia Communications founder John Rigas and his son Timothy Rigas of conspiracy, bank fraud, and securities fraud. A judge denied Martha Stewart's bid for a retrial and will deliver her sentence this week. And charges finally reached the top in the biggest case of all when a grand jury indicted former Enron CEO Kenneth Lay on 11 criminal counts, including bank fraud, securities fraud, and making misleading statements.
One would remind people that the supposed pursuit of "justice" is not a game in which we have "victory." These are legal procedures that destroy families, incarcerate talented people, and eviscerate legitimate business firms, apparently so that U.S. attorneys can bask in the glory that only the news media can provide.
Second, the reaction of the John Kerry camp should ring alarms as to how his administration would pursue "justice" if given the reins of legal power. The problem with the Lay indictment, according to Kerry, whose campaign advertisements tout his experience as a prosecutor, is that it did not come soon enough; Bush's friendship with Lay delayed what Kerry claimed should have been done three years ago.
This is disconcerting, to say the least. It took a long time for the DOJ to put together a case against Lay that even is presentable, and the indictment itself presents a weak (but politically charged) legal case. Kerry's response makes one wonder if he even believes that Lay should receive a fair trial at all—or, for that matter, even a trial, as opposed to summary judgment or the infamous military tribunals.
Ken Lay is a political prisoner. To put it another way, the charges against him are political, not criminal in nature. He was in charge of a company that had a spectacular fall, which is not a surprise, given that Enron was riding the crest of a speculative bubble that almost certainly was going to burst. (It is too bad that Lay, a Ph.D. economist, did not have training in the Austrian Business Cycle Theory, as he might have recognized the unstable conditions of the boom—conditions that mistakenly were called the "New Economy.")
Indictments are written for maximum effect, and Lay's is no exception. (One is reminded of the indictment against Michael Milken, which began with the statement that Milken earned $550 million in 1987, which the government held out as de facto proof that Milken was guilty as charged.) Yet, after one slogs through the 65 pages or so (another ploy by the government to imply guilt—the longer the document, the more guilty someone must be) in the federal indictment, one is struck by the lack of criminality.
The most "damning" charges stem from stock sales Lay made after it became clear that Enron was headed for trouble. Yet, his behavior during this whole episode does not square with the criminality that the government is alleging. For the most part, Lay held the bulk of his investments in Enron stock. When some of his financial advisors told him to diversify, he insisted on borrowing against his Enron stock to purchase other securities.
However, at times he received margin calls, which means that the borrower must produce cash immediately; the only thing he could sell quickly was his Enron stock, but then he also continued to purchase that stock even in the face of company problems. At the same time, he urged employees to purchase the stock—as he was doing.
These matters are public record, yet news accounts have made statements like "he was quietly dumping his Enron stock at the same time that he was urging employees to buy more," which says more about the integrity of U.S. mainstream journalists than it does Lay's stock sales. Even a cursory glance at the record demonstrates that reality is not what the government is claiming. But then, neither the government nor mainstream journalists are bound by truth; nothing should get in the way of a good story or a politically popular indictment.
A more problematic situation involves testimony that Andrew Fastow will give against Lay as part of his own plea bargain agreement, in which Fastow will allege that Lay was the "mastermind" behind the various schemes in which Enron officials tried to hide the company's losses. There is good reason, however, to doubt much of the veracity of what Fastow will testify, given the circumstances of his plea agreement. In order to get Fastow to roll, the government indicted his wife, Lea, for things not related to the Enron problem, something that ordinarily she might have been able to fight in court.
(As the noted criminal attorney Harvey Silverglate puts it, in situations like this, individuals testifying in order to reduce their own sentences are just as apt to "compose" as to "sing." If the perjury committed by one of the government's key witnesses in the Martha Stewart trial tells us anything, it is that the DOJ prosecutors prefer to hear rather creative and newly-composed "music.")
The Fastows have two young children, and prosecutors told them that if convicted, the youngsters would grow up without parents. No, U.S. attorneys did not use the thumbscrew or the rack, but they employed torture all the same. Given the duress under which Fastow and his wife made their plea agreements (she is in a federal lockup for one year, a place reserved for violent criminals, he will serve 10 years), it is doubtful that his testimony will be truthful.
Perjured testimony in federal court, unfortunately, has become a prosecution staple. As Paul Craig Roberts and Lawrence Stratton have written in their book The Tyranny of Good Intentions, federal prosecutions for the most part are politically driven and certainly not trustworthy. The 10-part series in the Pittsburgh Post-Gazette by Bill Moushey is another excellent expose of the federal criminal system, and we recently published an attack on the federal criminal system in Reason.
Nor is Lay likely to find an impartial or sympathetic jury anywhere. A Google search using "Ken Lay" comes up with approximately 195,000 hits, which means that few Americans have not heard about him or Enron. Furthermore, almost everything they know comes either from the mainstream press or from politicians, neither group having a vested interest in being truthful. If a federal judge was willing to accept a verdict in the Martha Stewart case in which at least one motivated juror committed a felony so he could be chosen (and, no doubt, had made up his mind before the trial that he would vote to convict her), then one doubts that whoever presides over the Lay trial will be anything other than a government stooge.
What a minefield the federal criminal system has become! It is not a copy of the state justice systems. For the most part, in the state systems, a crime (robbery, murder, rape, etc.) that harms someone has been committed, and it is up to the jury to decide whether or not the person in the dock is the one who carried out this particular act.
The federal system is quite different. As Silverglate writes:
In the federal system, we know what each party did. We try to squeeze those actions into some vague, broad criminal statute. If we succeed with one, he then testifies that his immediate superior not only conspired with him, but said things leading to a conclusion that he knew what he was doing was illegal. (Consciously intending to violate a known legal duty is the standard for a felony.)
As stated earlier, we are pessimistic about Lay's chances of avoiding conviction. His jurors most likely will consist of middle-class individuals who are loyal to the U.S. Government and will be of the mentality that anyone in the dock must be guilty by definition. Since the media has a vested interest in having been "right" in its demonization of Lay, it is doubtful that the coverage of the trial and pre-trial activities will change in its pro-prosecution, pro-government bias.
The Bush Administration has taken much heat for the economic downturn that has marked much of its tenure, and the government has been looking for someone in the business community to blame. Instead of admitting its own faults (remember the steel tariffs and other economic shenanigans) and telling the truth about why this recession has occurred, Bush and his underlings have looked for scapegoats in the private sector and Lay and many of his associates have been juicy—and politically popular—targets. Lay and other executives that have been charged with crimes did not cause the recession—that is Alan Greenspan's accomplishment—but the government has been glad to jump on the "corporate crime wave" bandwagon and the lapdog press has followed suit.
In his classic book Crisis and Leviathan, Robert Higgs points out how various crises enable government officials to grab power that before might have been denied to them. When he was a U.S. Senator, John Ashcroft objected to an attempt by Janet Reno's DOJ to slip through sets of laws that would further tilt the playing field toward the prosecution. (Ashcroft rightly called the proposed bill an example of "Big Brother.")
After the 9/11 attacks, however, Ashcroft's alleged allegiance to constitutional rights disintegrated along with the World Trade Center. To make matters worse, there were some spectacular business failures, including Enron and WorldCom. The 9/11 disasters and the business collapses provided opportunities for both U.S. attorneys and opportunistic politicians to claim that the recession was caused by a "corporate crime wave." Democrats blamed Republicans for having a lax system of regulations (despite the fact that many of the firms had strong relationships with various Clinton Administration members and Democratic members of Congress).
Not surprisingly, Republicans jumped when Democrats pulled their chain; furthermore, they had two "crises" through which to seize more power. The wars in Iraq and Afghanistan (the bulk of the government's so-called war on terror) gave government agents enormous power—as the recent torture scandals involving prisoners of war have demonstrated.
The high-profile business collapses also have enabled the government to further criminalize what in many circumstances would have been acceptable business behavior. When combined with the Patriot Act, which ratchets up laws against "money laundering" and gives government regulators and prosecutors easy access to whosever accounting books they wish to examine, the government has been able to grab enormous new powers, and the increase in "white collar" criminal charges has proceeded accordingly.
It's doubtful that Lay is guilty of criminal activity, especially in the sales of Enron stock. However, as the chairman of the firm, he had fiduciary responsibilities to the firm and stockholders. Moreover, many of the decisions he made, in good faith or not, resulted in huge business losses for investors, not to mention employees who purchased large blocks of Enron stock.
These matters are better suited for civil, not criminal court. Historically, this has been the venue where issues like this were argued and—at least to a point—resolved. By muscling into this legal realm, U.S. attorneys not only are criminalizing acts that are not traditionally criminal, but they also ensure that the people who should be receiving real justice are left out.
There is no doubt that there will be cheering when Lay's guilty verdict is announced and he is sentenced to what effectively will be a life term in prison. Americans have become people who enjoy watching others suffer—particularly watching leaders fall from grace—and perhaps one should remember that business executives have wives and children who also will have loved ones incarcerated for many years.
While U.S. attorneys are not providing bread and circuses to the masses, they are giving the public the next best thing: public humiliation of wealthy executives and their families, many of whom have committed the crime of being successful. Others, apparently, have committed the crime of not being successful enough.